Business Law: Venture/Entrepreneurship

We should begin by differentiating between a venture capital company-side practice and a venture fund formation practice. A traditional company-side venture capital practice focuses on the formation and financing of new and emerging companies to support entrepreneurs seeking to develop and market new technologies. A venture fund formation practice is a highly specialized practice that focuses on the formation of investment entities (typically venture capital limited partnerships) and in the representation of these venture capital funds in their investments in various portfolio start-ups. Some venture capital lawyers focus on one of these areas in particular while others practice regularly in all of these areas.

A venture capital practice could be based in many different technology center areas of the United States but the largest number of lawyers practicing in this area do so either in Silicon [...]

We should begin by differentiating between a venture capital company-side practice and a venture fund formation practice. A traditional company-side venture capital practice focuses on the formation and financing of new and emerging companies to support entrepreneurs seeking to develop and market new technologies. A venture fund formation practice is a highly specialized practice that focuses on the formation of investment entities (typically venture capital limited partnerships) and in the representation of these venture capital funds in their investments in various portfolio start-ups. Some venture capital lawyers focus on one of these areas in particular while others practice regularly in all of these areas.

A venture capital practice could be based in many different technology center areas of the United States but the largest number of lawyers practicing in this area do so either in Silicon Valley or the Route 128 Technology Corridor in the Boston area. This is particularly true for a venture capital fund formation practice, since so many venture capital funds are concentrated in these two regions. Large concentrations of emerging companies are found not only in Silicon Valley and along Route 128, but in San Diego, Los Angeles, Seattle, Boulder, Austin, Reston, Raleigh/Durham, and New York City. Building close relationships with clients is very important in a venture capital practice, so most firms serving this client base have offices in a number of these locations. Increasingly, start-ups are being founded internationally and investment dollars are coming from overseas investors.

Skills that are important in a venture capital practice include an adeptness at learning about a client’s businesses and goals and a high level of problem-solving skills. A venture capital lawyer often has entrepreneurial clients who are hard-working and expect their lawyers to work hard, too. Entrepreneurs and venture capitalists expect their lawyer to be available on essentially a 24x7 basis. Due to the nature of the clients’ businesses, a venture capital lawyer is also expected to have or develop a basic knowledge of relevant technologies, business models and corporate operations.

A lawyer with a venture capital fund formation practice advises his or her fund clients on a variety of different matters, including the structure and terms of a proposed venture fund, marketing strategy for the fund, internal management issues such as the addition of new partners and the separation of partners from the fund organization, and securities law issues. Terms for the venture fund are negotiated with investors’ counsel, who may comment on the basic terms of the transaction as well as on other legal matters addressed in the transaction documents. A fund formation lawyer needs to have a basic knowledge of certain tax issues (particularly partnership tax), since structuring considerations for a venture fund are largely tax-oriented. As with any other transactional practice, one of the busiest times in the fund formation practice occurs when the terms for the transaction documents are being negotiated between the fund’s managers and prospective investors in the fund.

A lawyer representing fund clients in a venture capital financing practice might spend a significant amount of time advising his or her clients on proposed venture capital financing terms and on voting and control issues associated with the client’s investment in the company. It is necessary to review financing documents and negotiate terms and provisions of these documents with counsel to the company. If the venture fund client is involved in a “down round” financing, the lawyer must advise clients on the various risks associated with the financing. He or she might also need to advise the client as to resolving legal and business issues that arise from due diligence on the company. A venture capital financing attorney should understand the fund client’s objectives and have a basic level of knowledge about the industries in which the client invests in order to provide optimal advice in these transactions.

A lawyer with an emerging companies practice will often spend a substantial amount of time advising clients on business entity structuring and formation issues. It is therefore important to be well-versed in choice of entity issues and able to counsel an emerging company client on the options available. As their emerging company clients mature, these attorneys will advise them on the terms of various financing alternatives and negotiate the terms and provisions of financing documents on their behalf. In addition to the focus on financing activities, in an emerging companies practice, it is particularly important to become knowledgeable about the client’s business and objectives. Company clients will also need advice regarding management and control issues, and on the areas of securities law that will affect their operations.

Working with start-up companies often provides a junior attorney with the opportunity to take on early responsibility in the client relationship. Client “teams” working with start-ups are often very small. Lawyers working with emerging companies provide both legal and general business advice on a wide range of issues to the venture’s board of directors and executive team. They therefore need to have a fairly broad background. Courses in corporate finance and accounting, as well as the traditional law school courses in corporations, venture capital and securities regulation are strongly recommended. During the life of the company, the venture capital lawyer will also provide advice and assistance on such various legal matters as employment, employee benefits, secured transactions and tax. In addition, since many emerging companies end by being acquired by another company, it is useful to understand the corporate acquisition context as well as the process of “going public.” Either event can be attractive to the original investors and venture capital firms as an opportunity for a return on their investment. A student interested in entrepreneurial ventures will also want to have some knowledge of intellectual property, as the single most important asset of a typical emerging company is its IP assets. Venture capital lawyers routinely negotiate and draft a variety of commercial and technology agreements for their client so a course or courses in intellectual property is highly recommended.

As venture fund lawyers also routinely represent their clients in financing transactions in their portfolio companies, the same advice pertaining to background and courses for start-up lawyers applies to this practice. As noted above, it is also especially helpful to have a solid tax background for a venture fund formation practice.